Monthly Archives: February 2013

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Today’s business climate poses many challenges – from increased global competition to a tight capital environment – that can hinder or even destroy a business. Companies struggling with poor cash flow, inadequate capital and weak leadership are especially vulnerable. Such companies can provide significant upside potential to the right buyers. But to turn an unprofitable company around, new owners must have an implementation plan and be ready to execute it.

Getting to the Core

If you’re a potential buyer of a troubled company, you must examine it closely for hidden values, such as untried territories or poor leadership. Then decide if these opportunities mitigate acquisition risks and potentially provide enough financial benefits.

It’s essential to understand the company’s core business – specifically, its profit drivers and roadblocks. Without a clear understanding of this, you may misread the company’s financial statements, misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action.

Due Diligence Matters

While due diligence is an important part of any acquisition, it’s probably the most critical stage in a turnaround deal.

Buyers should use a professional business intermediary who will take the time necessary to perform due diligence, request the supporting documentation needed and perform personal audits that cross-check reported and actual data. At this stage, it is important that the source of the company’s distress (such as maturing products or overwhelming debt) is pinpointed to determine what, if any, corrective measures can be taken. You also need to determine if the business harbors significant liabilities, such as pending legal judgments, product claims or dissatisfied customers.

This is the time to find hidden flaws. But due diligence may also unearth potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance with its industry peers’ can help reveal where opportunity lies.

Hit the Ground Running

Generally, the first post-transaction step is for new owners to determine what products drive revenue growth and which costs hinder profitability. This may be the time to divest the business of unprofitable products, services, subsidiaries, divisions or real estate. Staff cuts may further be in order. Make sure you keep key players. They may be expensive, but as long as they are pulling their weight and have good relationships, they have value when retooling.

Implementing a longer-term cash-management plan and forecast based on receipts and disbursements are also critical. Owners can manage each line item of the company’s weekly or daily receipts and disbursements in accordance with:

• Profit and loss projections,
• Changes in working capital, and
• Major debt and capital expenditures.

With a strong cash-management plan and a thorough evaluation of accounting controls and procedures, buyers should be able to identify lost revenue opportunities, such as unbilled services. This plan can also help buyers determine where they might be able to cut costs.

Mapping the Future

Buyers should ensure that accounting and reporting systems are producing the data necessary to run effective management reports. If these systems don’t accurately capture all company transactions and list all assets and liabilities, company leaders will be unable to fully pursue opportunities or respond to potential problems.

One troubled manufacturing company, for example, wasn’t tracking future purchase commitments. When the new owner took charge, it prepared and circulated among managers a comprehensive commitment and contingency report that helped senior management renegotiate the terms of the customer agreements.

Because the task may seem overwhelming, it’s easy for new owners to focus only on the business’s day-to-day operations. But a strategic plan that maps the path toward revenue growth and improved cash flow is necessary. Buyers may find, for example, that the company’s best revenue-producing assets aren’t reaching customers and that their potential could be realized with a more sophisticated marketing campaign or bigger sales staff. Macro- and micro-level planning is equally important.

Return to Profitability

Only a small window of opportunity is available to realize a turnaround’s potential. To take full advantage of it, buyers must get up to speed on the acquisition’s products, departments, delivery systems, staff and overall operating systems as soon as feasible.

Insurance specialists can also be used in a risk-management role, evaluating company insurance coverage and claims. Auditors may be useful for interviewing accounting personnel and financial statements to verify their accuracy. Finally, private investigators can research the backgrounds of key executives for possible fraudulent activity and misrepresentations.

JoAnn Lombardi VR President
B usiness owners face a myriad of challenges on a daily basis. One challenge no owner wants to grapple with is financial distress. ut if you've struggled with declining profits, rising costs, fierce competition and other overwhelming problems for some time, and the situation doesn't seem to be improving, selling may be the best solution. And there are steps VR M&A Advisors can assist you with to maximize your business's value and get a relatively fair sale price ….

The S&P 500 touched its highest level in five years, on optimism over
dealmaking and data showing rising investor confidence in Germany.

Office Depot (ODP) surged, as did OfficeMax (OMX) after The Wall
Street Journal reported that the two office-supply retailers are in advanced
merger talks. Rival Staples (SPLS) was also up sharply on the report.

Google (GOOG) traded above $800 for the first time. The gain was, in
part, fuelled by reports that the Internet company is looking into launching
retail stores to sell Google-branded products.

Rockwood (ROC) jumped higher after the company reported Q4 revenue
that beat estimates. The company said sales during the most recent quarter
climbed 2% to $829 million, benefiting from higher sales from its lithium,
advanced ceramics and titanium dioxide pigments businesses.

Humana (HUM) fell as the Centers for Medicare and Medicaid Services
proposed a decline in 2014 rates for Medicare Advantage that was lower
than the health insurer had expected.

In Canada

The S&P/TSX Composite rose for the first time in four days, led by gains
among banks, after a measure showing an increase in German investor
confidence added to signs of a European economic recovery. Great-West

Lifeco (GWO) agreed to buy Irish Life Group for $1.75 billion from
Ireland’s government, as it seeks to expand European operations. The
transaction should add about $215 million, or 10%, to Great-West’s 2014E
earnings.

Canadian National Railway (CNR) named Jim Vena, 54, its new Chief
Operating Officer after Keith Creel left earlier this month to be President
and COO of rival Canadian Pacific Railway (CP).

Fission Energy (FIS) and Alpha Minerals (AMW), who each own 50%
of the Patterson Lake South property, released news highlighting exciting
new results from ongoing drilling at the property. Results from hole
PLS13-038, which was a 385-metre step-out hole, yielded two zones of
strong mineralization. Keegan Resources (KGN) and PMI Gold (PMV)
announced that they are terminating their merger plans. The decision
comes as a result of the mutual determination of PMI and Keegan that it is
unlikely that PMI’s shareholders will approve the transactions
contemplated by the Arrangement Agreement.

Fortress Paper (FTP) jumped higher after the company announced that
they have hired Yvon Pelletier as the company’s new President of
Dissolving Pulp operations. Pelletier is a specialty cellulose industry
veteran with 30 years pulp and paper sector experience most recently as
EVP and President of Specialty Cellulose & Chemicals at Tembec (TMB).

On this day of love, it would seem that it is not being felt in the Euro zone as Q4 GDP fell 0.6%. That stat is causing the capital markets over there to sell off to the tune of approximately three quarters of a point. Asia showed solid gains (other than China as it is still closed until Monday) of about three quarters of a point.

Moving to North America, there seems to be lots of love in the air, but not enough to turn futures north as they are down by about a quarter point this morning. Bonds are rallying into the market slide by about the same amount.

The positive news in the US starts with the Weekly Jobless Claims which were well below estimates of 360000 at 341000 declining 27000 from last week. We then head to the consolidation room where Warren Buffet and his new date, private equity firm 3G Capital, have put an offer on the table to take HJ Heinz private at $72.50 per share which represents a 23% bump over yesterdays close. The deal valued at $28bn is the biggest ever in the food industry. Warren sees money in Ketchup!! The last kiss sees AMR (American Airlines) and US Air merging forming the largest airline on the planet. The merger which will need regulatory approval and will take the synergies of both companies to provide a more efficient travel experience.

In earnings news, two mandate positions are reporting today. RioCan beat estimates by a large amount and FFO (Funds From Operations) increased 16% to $116mn or $0.39 per share. CI Investments will also be releasing earnings today but had not done so as of writing this morning. Consensus estimates for the quarter are at $0.34 per share.

So today, with all the love in the air and the relatively positive news out there, we are in for a risk off day which would suggest a buying opportunity is on the horizon.

Valuations are valid only for a specific time and purpose. Typically, a valuator explains the valuation’s scope in an engagement letter and again in the written report. Despite this, business owners sometimes mistakenly think they can save time and money by recycling old valuations for new purposes.

In fact, the unintended use of a valuator’s conclusion can diminish the report’s credibility. It may lead to misinformed business decisions, fiduciary breaches and embarrassing courtroom mishaps.

One wrong turn leads to another

To illustrate the perils of recycled valuations, consider Otto’s Auto Mall, a fictitious private business that reused a valuation three times to save on appraisal fees. Below are the four scenarios under which Otto used the valuation.

Gift scenario 1. Otto initially sought an appraisal when he gifted 10% of the auto mall to his daughter, Olivia, in 2001. The valuator estimated that the fair market value of the business interest was $68,000, including a 15% minority interest (or lack of control) discount and a 20% lack of marketability discount.

Dissenting shareholder scenario. At about the same time, the value of Otto’s Auto Mall was subject to debate in a lawsuit with a 10% minority shareholder.Without disclosing the fact to his valuator, Otto applied the value from the gift tax return to the dissenting shareholder’s interest.

But Otto didn’t understand that a different standard of value-fair value-applied in dissenting shareholder cases in his jurisdiction. Based on relevant legal precedent, his partner’s interest wasn’t subject to valuation discounts. Rather, it should have been valued on a controlling, marketable basis. Unfortunately, because Otto’s recycled report applied an inappropriate standard of value, the judge disregarded it entirely and, instead, relied exclusively on the opposing expert’s analysis.

Divorce scenario. A year later, Otto filed for divorce. To value his largest marital asset-a 90% interest in Otto’s Auto Mall-he turned again to the valuation prepared for gift tax purposes. Otto reviewed the valuator’s analysis and adjusted her conclusion for marketability and control discounts taken on the 10% interest. Accordingly, he conceded during settlement talks that his 90% business interest was worth $900,000.

But Otto failed to consider the issue of goodwill. In his state, personal goodwill is specifically excluded from the marital estate. If a valuator had advised Otto about this issue, he could have argued that elements of personal goodwill existed. For example, over the past 40 years, Otto had fostered relationships with repeat customers, personally guaranteed bank debt and directly managed the service department.

Without Otto’s continued support in these activities the business value would drop substantially. In addition, Otto had historically taken very little salary and had just taken distributions from the business. An appraiser with divorce experience might have helped him avoid the “double dip” by making appropriate compensation adjustments to the business’s income stream.

Again Otto didn’t contact his appraiser before recycling her report. Assuming that the auto mall’s value included $300,000 of goodwill and roughly one-third was directly attributable to Otto’s personal efforts, Otto unwittingly overvalued his 90% interest by approximately $90,000 ($900,000 minus $810,000). Further, he was ordered to pay alimony on the distributions from the business while also paying for the value of these distributions in the business valuation.

Gift scenario 2. The most recent wrongful reuse occurred in 2006 when Otto gifted a 10% interest to his son Oliver. He erroneously assumed that the company’s value hadn’t changed much since 2001 and recycled the original gift tax valuation one more time.

But over the previous five years, the local marketplace had changed dramatically. Urban sprawl had finally reached Otto’s town, bringing in four new dealerships and two national service station franchises. Otto also had retired and relinquished control to Olivia and Oliver, who were still learning the business and building relationships and reputability.

Value is a function not only of the performance of the company, risk and the size of the business interest, but also of the valuation’s purpose and timing, as well as the relevant statutes and legal precedent. As this hypothetical example illustrates, recycled valuations can lead to significant errors.

Peter King VR CEO
I n a perfect world, business owners sell their companies when banks are anxious to lend, the economy is strong, their industry is booming and the business is enjoying record profitability, with the future looking even brighter. Naturally, a perfect convergence of all of these variables would enable you to maximize the value of your business – allowing you to sell it at the highest price and on the best terms. But most business owners don't sell when market conditions are perfect. nstead, they make the decision for more personal reasons, such as to retire or to free up cash to pursue other investment opportunities….

This morning we will see lighter volume in North America as the entire Eastern seaboard is getting pummeled by this storm. NYC is to get pounded and based on that many traders will stay home today. The same will hold true for Toronto.

With that said, Europe is still operating and is up about a half a point at midday. The region, after a couple of weeks of selling, rebounded today after the head of the ECB suggested that interest rate cuts are possible to continue to stimulate the economy. Also, China continues to stabilize and grow which is positive for the world economies but the risk of inflation is apparent again as growth accelerates. Also, EU leaders agreed yesterday that they will seek a more accommodative trade deal with the US and have drafted a joint statement that has been sent to the Whitehouse for discussion.

In North America, futures are just slightly higher this morning. Canadian Employment numbers came out this morning and the news was not good. In January, 22000 jobs were lost vs. estimates of an additional 5000. Also, December’s big plus 40000 jobs was revised down to 31000. The actual unemployment rate fell to 7.00% but due to people coming out of the workforce altogether not from job creation. We also got January Housing Starts for January and once again we saw a fall off from the previous month to 160000 units. That is down from 197000 in December and 201000 in November. While the US is stabilizing and seeing growth in housing and employment, Canada is stalling with the housing market as the main driver in my opinion.

Commodities are mixed this morning with Gold off a couple of bucks and oil up about a quarter point.